offset mortgages what are they?
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by: ChrisClare
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Some of you may not know exactly what an offset mortgage is, so in this article we will attempt to shed some light on this subject. We will aim to define an offset mortgage and illustrate how it may of benefit to you the borrower. It will also show how you may be able to save money by reducing the amount of interest you pay on your borrowed money.
Offset mortgages can be confusing as they are a fairly complicated creature. It is worthwhile taking the time to understand them, however, as many lenders will claim to offer fully offset mortgages and in actual fact, what they are offering is not strictly speaking fully offset. By reading on, you will be able in the future to identify the truly offset mortgage from a false one.
Flexible mortgage is another term used to describe an offset mortgage. Basically the way in which this mortgage works is that all of a customers finances are handled by one institution and that any interest from the customers debts can be covered by the interest gained from his credit holdings.
Let us use a working example. Let's say your mortgage is 100000 and you have credit card debts of 2000. At the same time you have savings of 20000. If, for example, you are paying 19% per year on the credit card bill, what an offset mortgage does is offset the interest on the credit card against the interest accrued on the savings. That is to say, that rather than pay 19% interest on the 2000 debt, the lender will charge you less interest on that but then give you a lesser rate of interest growth on your savings.
So in the example above the credit card would essentially be costing nothing and the mortgage would also be reduced for interest calculation sake by the remaining 18,000 which is not being used of the 20,000.
There are two immediate results of this system. You can either reduce what you are paying per month, or alternatively, by maintaining the current payments you are making on both your mortgage and credit card, you will have paid off your debts in a shorter time than first anticipated.
This may it look like you have lost your savings, but that is not the case at all. All it means it that you are not earning the interest you would have been on your savings, but are instead paying a lot less interest on your debts. Your savings are still intact, but are working for you in a different way. They are not earning interest, but are instead lessening your mortgage and credit card debt.
You can even find lenders who will set up your offset mortgage in the style of a current account. Your salary paid in each month will therefore also be considered as money owned as opposed to owed and will help to offset the interest payable. You have the benefit of your wages then reducing the borrowing interest and ergo the borrowing costs.
The following example should help explain this. You have a mortgage valued at 100000 and your monthly salary amounts to 2000. If your salary is paid into your policy then this has the effect that, for however long it continues to do so, it will be deducted from the total amount you have borrowed for the purpose of calculating the interest on your mortgage. This may not seem like much if calculated on a month to month basis but when you calculate the amount you would save over a period of, say, five or ten years then the overall figure could be far more substantial than you might have thought.
As each individual has their own financial situation it will be up to yourself to assess whether obtaining a full offset mortgage would be the best option to suit your circumstances but if the answer is yes then my advise is to seek the assistance of a mortgage advisor who will be only happy to help.
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